Good evening. I‘m Chris Matthews down in Washington again. Leading off tonight: The little state that could. Will Delaware, the first state to sign the Constitution, be the one to make or break the conservatives‘ chances of taking over the U.S. Senate this year? Tonight, we get the results of the big tea party challenge of Christine O‘Donnell to possibly win the Republican nomination for Senate over Mike Castle. If she does, it will be the eighth time in this political season that a far-right-of-center candidate beat out the favorite for a GOP Senate nomination. Are conservatives now ready to dump anyone who‘s even willing to talk to Democrats? We‘ll look at all the big races in seven states tonight and the District of Columbia and what‘s at stake at the top of the show.

Also, there‘s a great political battle brewing over taxes, as usual. My question. Catch this. Who wins if Congress fails to stop the tax hike set for everyone this January? If nothing gets done, who wins then? Who wins if the tax cuts are extended for all of us? Think about it. Who wins in November? We‘ll get into that one tonight.

And Harry Reid exchanges tweets with Lady Gaga on allowing gays to serve openly in the U.S. military. Reid now says he will try to get a vote this week on ending “Don‘t ask, don‘t tell.” Could this be about the election?

And “Let Me Finish” tonight with why not—well, why don‘t we just get rid of “Don‘t ask, don‘t tell,” period?

And before we get any further, we‘re going to be back at midnight tonight—that‘s 9:00 o‘clock on the West Coast—midnight tonight with a special primary night edition of HARDBALL to give you the full returns from Delaware, New Hampshire, D.C., and everywhere else in the country that‘s voting today. But that biggest on, of course, from Delaware, which will decide, many people think, whether the Republicans have a really good chance or very slight chance of winning the Senate this year.

Christine O‘Donnell was way back in the pack, way beyond previous cases like Rand Paul and Nikki Haley. Nobody was ever further back. She gets the big kiss of whatever from Sarah Palin. Now she‘s gunning for knocking off a guy that the Biden family was afraid to take on in Delaware, Mike Castle. What‘s happened?

CHUCK TODD, NBC POLITICAL DIR./WHITE HOUSE CORRESPONDENT: Well, look, if you want to find the trend here when it comes to these tea party-endorsed candidates upending the establishment, Delaware is certainly ripe for it, right? It‘s a small state. It‘s a closed primary. What do I mean by that? It means independents can‘t show up and pick a Republican ballot, only registered Republicans. So there‘s—there‘s number two.

A long-time incumbent, even though he‘s running for the U.S. Senate for the first time, Mike Castle has held office in Delaware, a very small state—held office in Delaware pretty much every year continuously, almost (INAUDIBLE) four-year period, since 1966. So the ingredients are all there for this to—what—to sort of history to repeat itself in what we saw in Alaska, in an odd way, what we saw in Utah—sure, that was a convention process, but in many ways, so few Republicans are going in Delaware, it‘s like a large convention process of what‘s going on there...

MATTHEWS: Yes.

TODD: ... -and even of what happened in Kentucky with Rand Paul. So all the ingredients are there, except this difference. Number one is that Mike Castle went after O‘Donnell, hit her hard. Now, granted, only in the last three weeks, but he hit her hard ever since he saw what happened to Lisa Murkowski.

MATTHEWS: OK...

TODD: And two, a lot of mainstream conservatives that have been supportive of the tea party movement, outside of Palin and Jim DeMint, have discredited O‘Donnell.

MATTHEWS: You know, I‘m looking at her face now. I‘m looking at—looks to be the new look of the conservative right. It‘s in often cases female, very camera-ready, in the sense of very good on television, very good on the radio, very articulate in the sense of being able to make a big, hard-line push seem very nice and acceptable and important, all the talents that matter to American politics today. And the old establishment candidates seem a little tired. Mike Castle looks tired.

MATTHEWS: Is that going to matter, just the telegenic factor, just the ability to get on there with a big smile and say, Look, I‘m today, he‘s yesterday?

TODD: I think when you‘re trying to tell Delaware Republicans, Vote change, do you vote the guy that you‘ve been voting for in Republican primaries every year since, I think, in his case, since 1980, when he ran...

MATTHEWS: Yes.

TODD: ... statewide as lieutenant governor, or the new gal? You know, so sure, I think just on simply—she looks more like change as far as a Delaware Republican or conservative.

But you know, there‘s another tension going on here, Chris, and that is this tension that you‘re seeing playing out, frankly, inside the Senate Republican caucus, which is how important is control, getting those 51 Republican senators...

MATTHEWS: Yes. Yes.

TODD: ... that puts Mitch McConnell in control, versus purity? The -

Jim DeMint has said he wants 30 Marco Rubios, rather than having a majority...

MATTHEWS: OK...

TODD: ... that is made up of a Charlie Crist or an Arlen Specter and...

MATTHEWS: Let‘s take a look at Rush Limbaugh now because I think Rush Limbaugh cuts to the heart of that argument. And this is among conservatives in the country. If you‘re a liberal, watch this because right now, the action ideologically in this country‘s on the right.

MATTHEWS: The Democratic Party is what it‘s been, center left. Barack Obama may be a tad to the left of the regular Democratic Party, but not more than a tad. And the Republican Party, though, is in play. It‘s in flux. It‘s the way the Democratic Party was back in the ‘60s. This is where the action is ideologically. It‘s being yanked to the far right.

Here‘s Rush Limbaugh doing some of the yanking today on radio.

(BEGIN VIDEO CLIP)

RUSH LIMBAUGH, RADIO TALK SHOW HOST: I have no brief for Christine O‘Donnell, but I‘m just going to tell you, a Senate full of Mike Castles is not going to get us anywhere. It‘s going to get a bunch of Republicans their chairmanships on the committee, but it‘s not going to do anything to reverse Obamaism, not one thing. It‘s not going to—if that‘s—if that‘s our majority, with a bunch of Mike Castles there, we‘re in trouble.

(END VIDEO CLIP)

MATTHEWS: Well, there you have it. The walrus under water has spoken. But there he is making his point. Jonathan Martin is here right now. Jonathan, this question. You‘re from Politico, right?

MARTIN: Well, you assume that the average grass roots conservative in Delaware is thinking about, Well, if I vote for her over Castle, is that going to somehow imperil our possibilities to pick up the Senate. I don‘t think that‘s how most voters there think. That‘s a little bit too tactical...

MATTHEWS: OK, is it more fun to vote for O‘Donnell or more fun to vote for Castle?

MARTIN: Tactical, I think.

MATTHEWS: What‘s more fun?

MARTIN: If you‘re a conservative in the grass roots in Delaware, probably her.

MATTHEWS: More fun. That‘s my question. If you go into that voting booth—and the liberals can figure this out as well as independents and conservatives—what‘s more fun, to go into the voting booth and really kick butt and really give it some oomph and some juice and know that you made a difference, or say, yes, we‘ll keep it going the way it‘s been for the last 30 years, we‘ll vote for Castle? That‘s the way I‘ve been voting. I mean, nothing‘s going to...

MARTIN: Well, Chris, keep in mind...

MATTHEWS: No, I‘m dead serious. Chuck, you‘re an expert on politics. Do you think voters like to go in there, put some juice in that voting machine, or they just want to approve?

TODD: Primary voters...

MATTHEWS: Approve things.

TODD: They just don‘t vote on electability. It‘s happened, you know...

TODD: Frankly, more times than not, a primary voter is motivated by their ideology, by their principles.

MARTIN: Right.

MATTHEWS: Has the Republican Party, in its main—meaning the excited part of the party, not the old breed party, but the new breed of hot ticket, hot tea party types—they‘re voting to me the way the old liberals used to vote. They used to have a phrase called NDC. It meant “New Democratic coalition.” But it also meant “November doesn‘t count.” Are Republicans voting like Democrats used to vote, November doesn‘t count?

MARTIN: Well, or as Goldwaterism. You know, it‘s...

MATTHEWS: In your heart, you know she‘s right.

MARTIN: Right. Exactly. And I think you‘re seeing some of that because your conservatives in a place like Delaware, or even nationally, they want somebody that‘s going to toe the party line, that‘s going to be...

MATTHEWS: ... why is he going to dirtball? Here he is with a robocall using her former campaign manager...

MARTIN: He‘s a moderate!

MATTHEWS: OK. Right.

MARTIN: In a primary, a closed primary!

MATTHEWS: OK. This isn‘t exactly establishment behavior, is it?

Although it‘s like Crocker Jarmon (ph) in the movie decided to go negative. Here he is, showing an ad from—the voice of Christine O‘Donnell‘s former campaign manager. Let‘s listen. It‘s running on the radio—actually, on the telephone today. Let‘s listen.

KRISTIN MURRAY, O‘DONNELL CAMPAIGN MANAGER: Hi. This is Kristin Murray. In 2008, I was the campaign manager for Senate candidate Christine O‘Donnell. I got into politics because I believe in conservative values and wanted to make a difference. But I was shocked to learn that Christine O‘Donnell is no conservative. You see, this is her third Senate race in five years. As O‘Donnell‘s manager, I found out that she was living on campaign donations, using them for rent and personal expenses while leaving her workers unpaid and piling up thousands in debt.

(END AUDIO CLIP)

MATTHEWS: Take that, Chuck Todd! I mean, really...

(CROSSTALK)

TODD: ... Alan Keyes...

(CROSSTALK)

MATTHEWS: Tell me how that works.

TODD: Well, he basically kept running for office and pulled—and actually pulled a salary, I believe, the last time because...

TODD: It is legal to actually pay yourself a salary of the job you‘re running for, if you‘re running for the U.S. House or the U.S. Senate in those new campaign finance rules.

But look, the fact that—you know, there‘s another big picture thing going on here, and we may see the Democrats go through this if Republicans win control of both the House and Senate this year, which is, when a party loses, they have an ideological fight and the base always wins in the short term. The question is, does it work in the long-term?

MATTHEWS: OK, look, I‘ve seen the Republican Party, a battle over the old breed and the hot tickets, new ones (ph), and I look at what‘s happening—we‘re going to get to this in the next segment.

MARTIN: Right.

MATTHEWS: But what a roll they‘re on. Nevada, they knocked out Sue Lowden and they put in Sharron Angle. In Alaska, they brought in Joe Miller out of nowhere. And in Kentucky, they brought in Rand Paul.

MATTHEWS: In Florida, you got Rubio. In Pennsylvania, they‘ve got Toomey. Now, Toomey‘s sort of an old breed tea party guy, but the fact is, in every case, they‘ve bumped the establishment candidate. This is a party in rapid transition. This is a party that‘s not the old party of Jerry Ford and Dick Nixon and even Reagan. It‘s a new kind of party.

MARTIN: Right. And Chris, what you just rattled off is precisely why Mike Castle...

MATTHEWS: (INAUDIBLE) Rush Limbaugh, Glenn Beck party!

MARTIN: But what you just rattled off explains exactly why Castle‘s airing that call that you just played because he saw what happened with Murkowski, with Bob Bennett...

MATTHEWS: OK...

MARTIN: ... with KBH in Texas, all these folks who said, It‘s not going to happen to me. That‘s why the past two weeks...

MATTHEWS: OK, I‘m looking at...

(CROSSTALK)

MATTHEWS: He says he doesn‘t like to get dirty or rough, but he‘s gotten it. Here he is, Nate Silver, one of our experts, projecting the Republicans have the strongest chance of taking over the Senate if Castle wins in Delaware, the more moderate guy, and Ayotte wins tonight up in New Hampshire at 30 percent. He says if they both lose, it‘s a lot rougher to win.

MATTHEWS: ... and net 10 if they pull off some upsets like in California and certainly in Wisconsin, places like that. Your thoughts.

TODD: Well, look, here—my last four Senate seats of the—there are 13 Democratic Senate seats in play. The last four to flip, in my mind, are Connecticut, West Virginia, California and Nevada, OK? And if you pull Delaware out of the equation, that means Republicans have to win two of those four that I identified, West Virginia, Connecticut, Nevada and California. And they all are, frankly, are a tad uphill in one form or another.

MATTHEWS: Well, I just gave them two circles.

TODD: And so—I agree. I think they can get to there. They can get there. It‘s just a little bit harder if you pull Delaware out of the equation.

MATTHEWS: So many people I know—look, I‘ll tell you a fact that we‘re not including here right in this conversation. We‘ll do it in the next segment. So many progressives I know are despondent. They don‘t think Barack Obama has been pluperfect the way they thought he should be. I think they‘re setting way too high a standard, but that‘s my view. Their view is he‘s not reaching their goals.

That will be a question of how that turnout occurs. If only the red-hot right votes, look out, everybody. That includes Boxer, that includes Patty Murray, that includes the governor of West Virginia. They could all go if the only people voting are the red-hot right and everybody else stays home or goes to the movies or sits home in the rain.

MATTHEWS: We‘re already working that side (INAUDIBLE) The far right is on the rise, and when a candidate like Mike Castle is no longer safe in a state like Delaware, you want to know just what‘s going on with the Republican Party these days. Something big-time is going—Democratic Party is still uneasy about the president. The Republican Party is in open rebellion.

You‘re watching HARDBALL, only on MSNBC.

(COMMERCIAL BREAK)

MATTHEWS: Well, talk about little old Delaware tonight, it‘s the big spotlight. But now look at what‘s going on in other Senate race in another Northeastern state, Connecticut. Linda McMahon is now just 6 points, a half a dozen points shy of Democrat Richard Blumenthal in the latest Quinnipiac poll, and that is a first rate poll. Look, at that, 51-45. It is getting real close. She‘s got the money. She may get the women‘s vote. That‘s it. This could be a real big surprise. And he had that problem with his war record. He got that wrong.

Let‘s get this -- 4 in 10 people who support McMahon say they‘re doing so mainly because they‘re against Blumenthal. I think it has to do with his talking about his war record inaccurately. That‘s a big hurdle for Blumenthal to overcome. They don‘t trust him. If I were him, I‘d straighten things out as fast as possible, say you didn‘t serve in Vietnam, you were wrong to suggest to anybody that you did. It was a dishonor to the people who served to even suggest you did. Just fix it, Mr. Blumenthal. That‘s what I‘d do.

HARDBALL returns after this.

(COMMERCIAL BREAK)

MATTHEWS: Back to HARDBALL. If Mike Castle loses to Christine O‘Donnell tonight in the big state of Delaware, he‘ll become the eighth Republican casualty of the party‘s right wing. Why are we seeing a trend of conservative voters rejecting Republican experts or establishment people for the Senate and taking people from nowhere? And what are the consequences for the Republican Party to build their house with these people from nowhere?

Matthew Dowd, a real pro, is now a “National”—God, the boy can write! -- “National Journal” columnist and a former strategist for the Bush-Cheney (INAUDIBLE) you were writing all those speeches -- 2004 campaign. And Sam Stein‘s the White House correspondent for Huffingtonpost.

Well, I can‘t resist the chance to start with a real Republican. Matt Dowd, you know, this used to be what the Democrats did, tear themselves apart. The old phrase was “NDC,” “November doesn‘t count,” just have a great time in the primaries. Doesn‘t matter who wins, as long as it‘s fun. Your party seems to be doing that right now. Maybe it‘ll work.

MATTHEW DODD, “NATIONAL JOURNAL”: Well, I don‘t know if many Republicans would consider me a real Republican since I‘ve broken in many ways with different Republicans on it. But I mean, I think what this is a reflection of is the frustration and anger that exists out there in America. And broadly, it‘s frustration, but in the Republican primary, it‘s intense anger. And who‘s suffering in that is anybody that represents the establishment or Washington in that mix. It‘s not necessarily an incumbent thing. Among Republicans, it‘s who represents the establishment or who represents Washington. And it‘s intense, it‘s hot and it‘s passionate, and it doesn‘t matter what‘s going to happen in November. Whoever represents that is in the way.

MATTHEWS: What is the smell of Washington that they don‘t like? Give me it in the cruddiest terms. If you‘re a tea partier and you think of Washington or smell it in your brain, what is it that you smell and don‘t like? What is it that‘s Washington that‘s bad?

DODD: And I don‘t think it has—it‘s not fully what—Barack Obama and his policies. I think it began in the last few years of Bush, where there was all the things that was spending. I think it is they think Washington is disconnected from people‘s lives. They think Washington spends money without regard for what‘s going on.

They think Republicans and Democrats, regardless if they get along publicly, cut deals and it‘s “I‘ll scratch your back, you scratch mine.” They‘re only interested in rising on the ladder. They‘re only interested in what they can get out of Washington. They‘re only interested in power for power‘s sake. They‘re not interested in designing and having a government that reflects where they are in their lives. I think that‘s what it is. And it doesn‘t matter if you‘re a Democrat or Republican. If you—if they feel you represent that, then they don‘t like you.

MATTHEWS: This is an ancient, almost primordial feeling, the middle class in any country feels. Robert Reich once taught me it‘s called “the rot at the top,” which he just described brilliantly, the rot - the sense that the big shots in Washington are selling you out, wasting your money that you paid in tax money, and the mob at the gate, whatever that means to you, illegal immigration, whatever it means, minorities, whatever it means, Welfare cheats, whatever it means to you, the mob at the gate and the rot at the top, and you‘re stuck in the middle. And that‘s where a lot of voters feel right now, obviously.

STEIN: Well, yes. Look at these...

(CROSSTALK)

STEIN: I‘m sorry.

But look at these Republican primaries. If you look soberly at each of the candidates that were defeated, these were conservative candidates. These were not people who were necessarily that far out...

Here are the Republican Senate candidates who were either toppled by Tea Party candidates or driven out of the party. Trey Grayson, the guy that couldn‘t lose in Kentucky, the best friend of Mitch McConnell, lost to Rand Paul, who couldn‘t win, but did.

Florida‘s Charlie Crist, a very popular governor, driven out of the party by Rubio. Utah‘s Senator Bob Bennett, how can you get more conservative than him, knocked off in his reelection by Tea Partiers. Alaska Senator Murkowski out of nowhere defeated by a guy named Joe Miller. Pennsylvania‘s Arlen Specter, who had never lost a race, blown away by Pat Toomey, forced to quit the party and become a Democrat.

Sue Lowden, who was a very attractive candidate in so many ways, should have won that nomination, blown away by Sharron Angle of the far right. Jane Norton the Colorado primary to Ken Buck.

I‘m looking at these people that, if were doing a morning line on this, you would say everyone was going to win. They were all going to win.

STEIN: Yes. And like you hinted, each of them in one way or another a flaw. And a lot of times, it was just simply that they were the pick of the establishment, and whether it was the NRSC, or whether it was Mitch McConnell with Trey Grayson. In other cases, like with Bob Bennett, there was a specific vote where he was deemed not...

SAVANNAH GUTHRIE, NBC WHITE HOUSE CORRESPONDENT: Seven of the establishment Republican picks, candidates you got behind in primaries, have gone down to defeat, including in your home state of Kentucky.

So do you feel like the Republican Party is rebuking your and the establishment picks?

SEN. MITCH MCCONNELL (R-KY), MINORITY LEADER: Well, look, the primaries—the voters in the primaries get to decide who the nominees are. There was one state, Utah, where the primary voters didn‘t get a chance to decide. It was done by convention.

But, you know, those things sort themselves out and we‘ll get behind the nominees of the party. The real elections are not in the primaries or the convention, the real election‘s in November. And, as I said, I‘m optimistic I‘m going to be the leader of a larger group than I am right now.

(END VIDEO CLIP)

MATTHEWS: Boy, Matt, there‘s a pol, if there ever was one. What a smart pol, a survivor, if there ever was one.

Mitch McConnell has had his head buried in a gopher hole for a year-and-a-half. He‘s coming out just in time to take the plaudits for winning the Senate, if he does. If he doesn‘t, he will say he did his best, and he will probably get a laurel wreath for that, but he didn‘t want these candidates, did he?

DOWD: No, he wanted candidates that were sort of part of the mainstream, part of this that sort of—honestly, that were going to be get along, get along. They would abdicate to his leadership. They would do what he wanted.

I think the guy on Election Day, regardless of the way it turns out, who should have a real fear about some of these guys coming to the Senate and who they represent, if Marco Rubio wins, if Joe Miller wins, if other folks win around the country, is Mitch McConnell, because these guys are not going there in order to get along and go along.

And they are not going to—you think they have disagreements with the Democrats. They‘re going to show real disagreements with the Senate—future Senate minority—majority leader if he wins.

MATTHEWS: Are these voters—and I think voters are great—and I think democracy has been spectacular for this country for 200-plus years. And it always amazes me how people are really smart.

Are they electing people to bark at the moon, I mean, really to come to come back to Washington and just go—and just bark at the moon and make weird noses at their other members, don‘t meet anybody else, don‘t shake hands with anybody in the establishment, don‘t get a house in Washington, maybe stay in a hotel, but really keep away from the people, because they‘re evil and dirty? Do they want them to do that?

(CROSSTALK)

STEIN: There‘s not going to be the collegiality, although that has dissipated greatly.

MATTHEWS: Do they want them to join the Senate or to just show up and then...

STEIN: No, they don‘t. They want them to show up and represent their interests. They like term limits. Rand Paul today said something very important. He said he was going to veto or help filibuster—not veto—help filibuster any budget that wasn‘t balanced.

They have Joe Miller, who says he wants to get rid of Social Security. You have a bunch of these people who want to get rid of the Department of Education. These are not people who want to work within the Republican tent. They want to change government as you know it. And it‘s going to create, as Matt notes, real problems in the GOP.

We talked about “Star Wars” bar scene, a fight scene out of “Star Wars.” That‘s what it‘s going to be.

MATTHEWS: Matt?

DOWD: Well, let me—Chris, I just want to say one thing. There‘s a huge obviously distrust of the federal government. It‘s not just Tea Partiers. It‘s broadly in the country.

Anybody that presents a federal government solution to a problem is automatically suspect and is toxic.

DOWD: Barack Obama has created his own problems by presenting many federal government solutions to the problems.

This is not going away. Whether these Tea Party folks win or not, there‘s a huge segment out in the country, a majority, who does not trust the federal government to deal with problems anymore.

MATTHEWS: Well, that‘s been the progressives‘ failure, not to be able to sell what they have been doing, because the Democratic Party, like it, love it, or hate it, is the party of government.

It‘s got to make the case for a progressive, successful, effective government that meets the needs of the people at a reasonable price in terms of taxes, or it will be rejected. In this term, it looks like it‘s getting rejected.

Thank you so much.

Thank you, Matt Dowd.

Thank, Sam Stein.

But it is the challenge of progressives. Conservatives win when people lose faith in government.

Up next: We know Republicans love to demonize Nancy Pelosi, but a new ad from her opponent in San Francisco may be going a bit far. He‘s got her as the Wicked Witch from “The Wizard of Oz.” Of course, this fellow is not going to win. Republicans have been fielding candidates for years in San Francisco. They get about—well, 10 percent.

You‘re watching HARDBALL, only on MSNBC.

(COMMERCIAL BREAK)

MATTHEWS: Back to HARDBALL. Now to the “Sideshow.”

First: making a splash. Nancy Pelosi‘s Republican challenger, such as he is, John Dennis, is all but assured losing this November. But that doesn‘t mean he isn‘t willing to get down in the mud. Check out his new Web ad.

(BEGIN VIDEO CLIP)

UNIDENTIFIED FEMALE: Hello, my pretty. I will save you from those evil Republicans. And here are my monkeys to make you pay for it all.

UNIDENTIFIED MALE: Get back, everyone.

UNIDENTIFIED FEMALE: Oh, I‘m melting.

UNIDENTIFIED FEMALE: Thank you for saving us. Who are you?

JOHN DENNIS ®, CALIFORNIA CONGRESSIONAL CANDIDATE: I‘m John Dennis. I‘m running for Congress. I believe in following the Constitution and I believe in reducing debt. And I believe it‘s time to throw a little water on politicians who say one thing and do another, like Nancy Pelosi.

Well, Dennis says to look out for more parodies from him like that. “A Few Good Men” is one of them and “James Bond” in the coming months, whatever those are going to be like.

By the way, Pelosi‘s last Republican opponent won a grand total of 10 percent of the vote.

Next: back-to-school politics. Remember when Florida Republican Chairman Jim Greer whacked at President Obama for giving a speech to Texas schoolkids? He accused the president of—quote—“using taxpayer dollars to indoctrinate America‘s children to his socialist agenda.”

Well, one year later, it appears Mr. Greer has had an epiphany.

Here‘s what he put out ahead of the president‘s today to a Philadelphia school—quote—“In the year since I issued a prepared statement regarding President Obama speaking to the nation‘s schoolchildren, I have learned a great deal about the party I so deeply loved and served. Unfortunately, I found that many within the GOP have racist views, and I apologize to the president for my opposition to his speech last year and my efforts to placate the extremists who dominate our party today.”

Well, Greer‘s break with Republicans may have been helped by the fact he‘s facing charges of fraud and money-laundering from his tenure as state Republican chairman down in Florida.

Well, finally, you think Rahm Emanuel‘s a shoo-in for the mayor of Chicago? Well, think again. While Rahm has yet to announce formally, former Illinois Senator Carol Moseley Braun is set next week to announce officially that she‘s running. This can‘t-be-missed reelection fight, this is going to be one heck of a fight in Chicago set for February 22.

Up next: Who wins the big political battle over taxes? I think taxes is going to be knocking at the door of voters as they go in that booth. Democrats say Republicans are holding the middle class hostage, so rich people can get tax cuts. Republicans say the Democrats are waging class warfare. They‘re probably both right.

Stocks finishing little changed, as pockets of strength offset by pockets of weakness, the Dow Jones industrial average slipping 17 points, the S&P 500 down just a fraction, and the Nasdaq, though, with a four-point game.

Shares in major retailers spiking today on steadily rebounding sales. August sales rose four-tenths-of-a-percent. That was more than expected and the biggest increase in five months. Best Buy was a standout today, surging 6 percent on better-than-expected profits and an improved outlook.

Cisco shares also finishing higher after announcing it will begin paying a dividend of between 1 percent and 2 percent. That will start in 2011. But industrials were under some pressure today on slowing demand for steel and a sector downgrade from Goldman Sachs.

Boeing took a hit on a report that the WTO will rule that it received about $24 billion in illegal tax breaks from the U.S. government.

That‘s it from CNBC, first in business worldwide—now back to HARDBALL and that sharp tie with Mr. Matthews.

MCCONNELL: I‘m not going to answer all these hypotheticals. I‘m going to tell you what I think we ought to be fighting for in the Senate is a permanent extension of the current tax rates.

(END VIDEO CLIP)

MATTHEWS: Welcome back to HARDBALL. That was Senate Republican Leader Mitch McConnell earlier today on morning rundown—“DAILY RUNDOWN.” I love that show, by the way. I was on my track today, actually my run—my—what do you call that thing?

JENNIFER PALMIERI, SENIOR VICE PRESIDENT FOR COMMUNICATIONS, CENTER

FOR AMERICAN PROGRESS: An iPod?

MATTHEWS: My—my—the thing you run on.

(CROSSTALK)

PALMIERI: A treadmill?

(CROSSTALK)

MATTHEWS: My treadmill.

On the tax fight, all or nothing or something in between, and which side has more to gain and more to lose before the midterm? This is exciting because it affects everybody watching right now who is working, your taxes.

PALMIERI: No, they don‘t. When you say should we extend the Bush tax cuts, 52 percent of Americans say no. I think it‘s because that they think those tax cuts all go to rich people.

But then when you say should you extend them for rich people or should you extend them for only the middle class, they pick only the middle class. And I think what‘s great about what John Boehner has done is, he has clarified the difference between the Democrats...

MATTHEWS: By saying he would sign that bill.

RON CHRISTIE, FORMER SPECIAL ASSISTANT TO PRESIDENT BUSH: Right.

(CROSSTALK)

MATTHEWS: Let me just try something by you. I tried it by Ron before we went on the air.

If nothing happens, we all know everybody‘s taxes go up in January, right? Who wins then? If we go to the voting booth and everybody walks in the voting booth and nothing has been happening, and therefore everybody‘s taxes who is watching now are going up in January because they couldn‘t get bill passed, who wins in that case? Who wins then, Democrats or Republicans?

(CROSSTALK)

PALMIERI: It‘s not going to happen in a vacuum. There will be a floor fight. There will be a debate. And I think if they can‘t get a bill passed, what the Democrats will say is, this is what the election is about. It‘s about making this decision.

MATTHEWS: But won‘t people blame the Democrats because they‘re in power?

PALMIERI: I think if you—if you—and, again, Mr. Boehner helped us make this case. If you‘re able to say, I wanted to vote for tax cuts, to extend tax cuts for the middle class, they wanted to give $700 billion in more tax cuts to rich people, and I wanted to stop that, and we‘re going to come back and fix it next year.

MATTHEWS: Well, that‘s the polling. Democratic polling under Stan Greenberg is making her case. It does say that people are willing to fight this fight that the rich shouldn‘t get the tax cut.

The Democrats believe this. I hear Nancy Pelosi believes it in her gut and she‘s going to fight like heck on this. You say?

CHRISTIE: It‘s a mistake.

To answer your first question, I can‘t think of anybody across this country who wouldn‘t want a tax cut. People who are working very hard, people who have very limited resources, people want a tax cut.

(CROSSTALK)

CHRISTIE: But the class warfare distinction, I think the Democrats are making a mistake. If the Democrats do absolutely nothing between now and the November election, and everybody‘s taxes go up, the Republicans do well. The Republicans can go back and say, see, we told you.

(CROSSTALK)

MATTHEWS: I would say most Americans, like 90 percent or 95 percent, don‘t know anybody, never shaken hands with, never talked to anybody who makes over a quarter-million a year.

CHRISTIE: Oh, I believe that.

(CROSSTALK)

MATTHEWS: There are counties in Pennsylvania that don‘t -- $100,000 is almost—maybe one person makes that kind of money.

The problem is we have had an administration that has spent almost a trillion dollars on a stimulus bill saying, we‘re going to get out of the ditch by using Keynesian economics to try to perpetuate the government...

(CROSSTALK)

MATTHEWS: OK. Let‘s not get into that Keynesian economics.

Let‘s talk taxes here. If the bill gets passed, and the tax cut goes through, and the middle class, the $250,000 people and below get their tax cut, who wins? No, and I want an honest answer.

(CROSSTALK)

CHRISTIE: Yes.

MATTHEWS: Dems or Republicans, if they get the tax cut through, if they keep the tax cut for the middle class.

CHRISTIE: If it‘s $250,000 and below, I think the Democrats win, because the Democrats can say, we are fighting for working families...

MATTHEWS: Clearly, if the Democrats—suppose it goes out somewhere in the middle and ends up the only bill they can get passed is a one- or two-year extension of tax cuts for everybody. Who wins then, politically?

CHRISTIE: I think the Democrats win that. I think the Democrats can say, see, President Obama‘s trying to meet the Republicans halfway. You know, we can‘t raise taxes in a bad economic time. I think it makes it a lot easier for them.

MATTHEWS: But they‘re willing to take the loss because if nothing gets passed, they win.

PALMIERI: They think that they win. But I think that the one thing

--

(CROSSTALK)

MATTHEWS: You think they win if nothing gets passed?

PALMIERI: Because we‘re going to have a fight about it. And the thing is—

MATTHEWS: OK. Here‘s the president. Let‘s listen to President Obama on this issue because I think it‘s tricky, but most people follow common sense. If Democrats are in power and they don‘t get their tax cut, they blame Democrats. If Democrats are in power and they do get their tax cut, they thank Democrats a little bit.

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: We could get that done this week. But we‘re still in this wrestling match with John Boehner and Mitch McConnell about the last 2 percent to 3 percent where we‘d be giving $100,000 for people making $1 million or more.

(END VIDEO CLIP)

MATTHEWS: Can the president of the United States turn these guys into target practice?

CHRISTIE: No.

MATTHEWS: Can he make John Boehner and Mitch McConnell the ugliest men in America? Can he do this?

CHRISTIE: No, look—

(CROSSTALK)

PALMIERI: You‘ve got to define—

CHRISTIE: Let me phrase it this way: John Boehner‘s a friend of mine. I love the guy. I‘m positive that most people in this country don‘t know who John Boehner is.

MATTHEWS: But we know he smokes.

CHRISTIE: Who cares? Who cares? Look, the important thing here is that this doesn‘t look presidential. You have the president of the United States out there saying John Boehner and McConnell. You are the president of the United States. You have the bully platform. You have the pulpit.

MATTHEWS: You make your point well. Isn‘t that the problem for the president of the United States, who is the president, that don‘t blame me, I‘m running the country.

CHRISTIE: Right.

MATTHEWS: I‘ve got a Democratic Party running the Congress. Blame this guy from Ohio that smokes and plays golf.

PALMIERI: Right. But first of all, it happens to be true, that they are the ones that are standing in the way of him doing what he wants.

CHRISTIE: No, it‘s not.

(CROSSTALK)

MATTHEWS: But he said he‘ll vote for it. He said on Sunday that he‘ll vote for the bill if that was the only choice.

PALMIERI: His problem with the midterms for the Democrats have been that it is just a referendum on the economy and what the White House is trying to do and I think it‘s smart to do, is to make it a choice. It is not—because that is what voters make it. They are making a choice between Obama‘s direction or John Boehner‘s and the Republican‘s direction. And I think what they‘re doing is the only way you can say—

(CROSSTALK)

MATTHEWS: OK. Let me ask you about (INAUDIBLE). The Tea Party throughout there, it‘s been almost an insurrection now for a year and it‘s been very effective. They‘ve won we talked about throughout the program tonight, they‘ve won seven big races, knocking out establishment figures. People that could be beaten, Specter, Charlie Crist, Bob Bennett—

MATTHEWS: -- Murkowski, incumbents and challengers—knocked them all out. Their focus is against government, against taxes. Are they going drive the Republican thinking on this to the point where it‘s the number one issue, we‘ve got to get tax cuts?

CHRISTIE: Yes, absolutely. Look, Republicans got fired because we spent too much, we forgot what we came from. We became just like Democrats. The Tea Party from around this country are sick and tired of the conventional wisdom that Washington knows best. We‘re going to tell you what money you can keep and what not. And this is, we‘re looking at an insurrection.

Up next: what Senator Harry Reid doing with the military‘s “don‘t ask, don‘t tell” policy? Well, he wants a vote. But can he get 60? That‘s what it takes to get—to knock the filibuster.

And what happens inside the military if it does—if they do get rid of “don‘t ask, don‘t tell”? We‘re going to talk about those questions. The politics and reality of getting rid of “don‘t ask, don‘t tell” and having open service for people regardless of their sexual orientation in the military—which looks to be the future. The question is when is it coming and how are people going to handle it?

This is HARDBALL, only on MSNBC.

(COMMERCIAL BREAK)

MATTHEWS: Hot news just in. Yesterday, we told you about how Republican candidate for governor, California Meg Whitman ripped a scab off of a fight between Jerry Brown and Bill Clinton going back to 1992. Well, today, former President Bill Clinton endorsed Jerry Brown. It‘s a big thing to do that in the race, saying they put their fight behind them years ago. For his part, Brown called Clinton‘s endorsement and his presidency accomplishment-rich.

It is an awful week, we can get by Lady Gaga—Senator Harry Reid tweets a military policy into one second, but tonight, we can, Lady Gaga who dominated this year‘s Video Music Awards sent this tweet and photo. It reads, “Gay veterans were my VMA dates. Repeal ‘don‘t ask, don‘t tell.‘ Call Harry Reid to schedule vote.”

Well, Senator Reid scheduled a vote. He‘s bringing the matter to

the floor as part of Defense Authorization Bill and re-tweeted this today

in reply to Lady Gaga. “There is a vote on DADT—that‘s ‘don‘t ask,

don‘t tell‘—next week. Anyone qualified to serve this country should be allowed to do.”

Katherine Miller decided to leave West Point because she no longer wanted to serve under “don‘t ask, don‘t tell.” She was one of Lady Gaga‘s dates, if you will, to the music awards.

Matthew Alexander served 18 years in the Air Force as an adviser—he‘s an adviser on O.T. votevets.org. And he‘s the author of “How to Break a Terrorist.”

Let me ask you both—Katherine first—let‘s assume that this is going to come to a vote. It may not get the 60 this time. It may get—the courts may rule on this. It may take a year. It may take a little longer than that.

What do you think will be the difference when we have open service? What would be different? How would it be different, Katherine, do you believe?

KATHERINE MILLER, FMR. WEST POINT CADET: Actually, I think we‘re overestimating the differences that repealing “don ask, don‘t tell” is going to entail. I think it‘s going to be a smooth transition. The military‘s more than prepared to make this transition, and I‘ve been exceedingly proud of them. You know, for being able to make a difference, desegregation and the integration of women. So, really, I think we‘re overestimating the differences it‘s going to take.

MATTHEW ALEXANDER, FMR. SENIOR MILITARY INTERROGATOR: I think moral will actually improve because we have members serving in the military today who aren‘t allowed to disclose their sexuality. I have a good friend, won a Silver Star in Afghanistan, and he got out of the military because of this policy—not even because he was forced out, but because he felt it created an atmosphere that wasn‘t conducive to him continuing to serve. And so, we lose good people because of it and we‘re all the worse for that.

MATTHEWS: Well, but you‘re all for it, but let me get back to Katherine.

Why are people against open service? Why are people in the military resisting? Why is it going to be so hard for Harry Reid to get 60 votes this week to stop a filibuster? Who‘s resisting this because the public seems to be for it? Who‘s fighting it?

MILLER: You know, it‘s a really small minority. I feel like this

minority though of, in my case, cadets, but soldiers at large and, you

know, some of our general officers, they are very vocal about their

homophobia and, you know, they are scared of making this transition. And -

MILLER: I mean, I think that‘s a difficult question. Mainly because there‘s a big generational gap between, you know, the general officer corps and our young rising leaders, our second lieutenants, because homosexuality is something—is a fairly new concept to these people. So, I think the generational gap is causing a lot of fear and discomfort at the higher levels.

MATTHEWS: Matthew, why are people against it? Why are we arguing this thing? Because young people, I know that all the numbers, in fact, the country is pretty much overwhelmingly for open service now. But yet, I predict they are not going to get 60 votes.

So, I‘m telling you why I‘m bringing this up, there is a cultural resistance. Jim Webb, the senator from Virginia. There are people in the Democratic Party. Certainly, John McCain in the Republican Party, with a lot of military background, they don‘t want this.

ALEXANDER: Well, it‘s a political issue it‘s why. It‘s not reflected by the people in the military, especially the younger generations of people in the military and it‘s definitely not reflected by the public who acknowledges that we already have homosexuals serving in the military, who are performing admirably. They are already serving side by side. They are already sleeping in the same tents.

Logistics of it that people use as an excuse are not even valid because homosexuals are already serving in the military and we are already performing our missions without them being able to serve openly. But allowing them to serve openly will give everybody equal chance to serve this country based on their competency, not based on their sexuality.

MATTHEWS: Well, let me ask but a couple things that might trouble some people. You can call it homophobia, but it‘s part of the debate there. Some people argue that we separate the sexes in the barracks for good reason. They go out on leave, whatever they mix among the genders and they have whatever sex they enjoy or whatever, they certainly have romance and attraction. But the way they separate people who are attracted to each other is they put them in different barracks.

Do you have to make any kind of adjustments once you have open service for gay focus, gay people as well?

Your thoughts, Katherine. Just leave the military conduct requirements exactly the way they are.

MILLER: Oh, I mean, absolutely. I think we have Uniform Code of Military Justice and we have regulations already in place to regulate conduct. And if there‘s a problem, we‘re going to address it. It‘s—under no circumstances is it OK for, you know, a senior to be in a relationship with a subordinate or, you know, two roommates.

MATTHEWS: So, fraternization rules would just have to be strictly enforced, you‘re saying? Like, for example, you have a drill instructor that they may obviously have an attraction to somebody in the ranks and that everybody knows about, that would cause a lot of problems, obviously. But you say you can deal with that in terms of just discipline. There‘s to be no camaraderie, no fraternization, period, between the ranks?

MILLER: Right. Adhere to existing military policy that we have, you know, already regulating these behaviors. If it‘s unacceptable behavior for heterosexuals and it‘s also unacceptable for homosexuals. We‘re not asking for special treatment. We‘re asking for equality on this.

MATTHEWS: Yes.

And, Matthew, you don‘t see any problem. Because I hear these arguments made—I was an adviser to Peace Corps. We didn‘t have these issues, obviously. But the fact is, there are people who argue you can‘t have the same barracks, people who are attracted to each other.

Do you see any requirements for changing the rules to make that obviously a more disciplined situation than it has to be right now?

ALEXANDER: No, I don‘t, Chris. You know, I have been a criminal investigator for the military for almost eight years and we quit investigating homosexual conduct years ago because we realized it doesn‘t affect unit morale. You know, it‘s based to on—we have a Uniform Code of Military Justice and our investigations and our corrective action should be based on conduct, misconduct, and not on someone‘s sexuality.

MATTHEWS: OK. Well, we are going to have this argument for a while because it looks like it‘s not going to pass right now. The courts are getting into this. I think it‘s getting close to an unstoppable force to bring an end to open service.

But thanks so much and congratulations, Katherine. It‘s great to have you on the show. It is an honor to have you on. Well, you‘ve been through a lot and great spokesman for this issue. Matthew Alexander as well. Thank you both for coming on.

When we return, I‘m going to have some thoughts about why it‘s time to end “don‘t ask, don‘t tell.”

MATTHEWS: Let me finish tonight with a question of open service in the U.S. military.

I think “don‘t ask, don‘t tell” was probably destined to be an intermediate solution in the debate between those who support it and those who opposed open service. The premise was that a gay person would agree to a strange compact on joining the military services. A gay person would be allowed to serve as other Americans do, but only if he or she didn‘t say they were gay—if they didn‘t declare their sexual orientation in some other direct way.

The problem, as has been explained on this show, is that this “don‘t ask, don‘t tell” rule didn‘t apply to straight soldiers. They could come back from a weekend pass full of romantic exploits, sharing them for all to hear. The gay soldier or sailor would have to keep quiet on what he or she did over the weekend. To do otherwise would be to violate the compact, “don‘t tell” has meant just that, don‘t tell.

My hunch, having never served in the military myself, is that soldiers learn not to ask gay soldiers questions about their lives for the simple reason that it would require them to tell, which is grounds for discharge. So the U.S. Senate‘s on the verge of dumping “don‘t ask, don‘t tell.” Open service is very much in prospect, primarily because the American public has changed its mind on this matter. Never has it changed its mind so quickly so dramatically.

The social acceptability of anti-gay bias is rapidly diminishing, just as it did in the years after World War II towards Catholics and also for Jewish people, and sadly, only gradually, for African-Americans. Military service was one reason prejudice began to die. It‘s hard to deny a person full acceptance when you know firsthand how they have given for our country.

Here today, we have a case of a group of Americans ready to fight for their country, openly and with full pride in who they are. As I said, the American people have changed—have never changed their minds so quickly. Perhaps the reasons are not so different from the reasons why war time in the 1940s saw such a shift in national attitudes. Perhaps one powerful reason for the acceptance of gay fighting men and women is the obvious desire of so many gay people today wanting to serve their country in uniform at a time when such service is extremely perilous.

That‘s HARDBALL for now. Thanks for being with us.

Right now, it‘s time for “THE ED SHOW” with Ed Schultz.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.